Michael Harrison's Outlook: Goldman's can't go overboard in bidding for ABP, but can it really afford another failure?

Click to follow

Poor old Goldman Sachs. It is not very often you see those four words written down together. In recent months the investment bank has tried and failed to buy a television company, a pub chain and an airport operator in that order. Yesterday, it thought it had finally landed its first catch with an agreed £2.5bn bid for Associated British Ports worth 810p a share.

Twenty minutes after the announcement, Dresdner Kleinwort Wasserstein steamed into the market offering to buy ABP shares at 820p on behalf of our own dear 3i and those ubiquitous Australians around at Macquarie Bank. Last night they confirmed that they were indeed considering making an offer along with a Canadian pension fund.

So much for the Goldman camp's earlier dismissal of the market raid as a desperate attempt by what remains of DKW's corporate finance division to restore its tattered reputation. The raid was a failure, picking up only a tiny lump of ABP shares. But that no longer matters.

The word last night was of the rival bid coming in at 830p.

If that is the case, then the 3i consortium seems to have moved with breathtaking speed to put together a deal in the face of a falling stock market and a rising interest rate curve. Goldman and its partners have been beavering away on the ABP deal for six months and have spent the past three reaching a price that the ABP board could recommend.

In all that time, ABP has not received any rival proposal, suggesting that 3i and MacBank have managed to get the debt financing in place in remarkably short order. By bringing in the Canadian Pension Plan Investment Board, they have also found an equity backer to help fund a deal which would have been too rich for 3i to handle on its own balance sheet and too risky for MacBank to fund given how notoriously stingy it is when it comes to putting up its own money.

As ABP becomes the latest battleground for a scrap between rival private equity consortia, its chairman Chris Clark can afford to lie back and have his tummy tickled much as Sir John Parker did at P&O.

The price being offered by Goldman's already looked full by any standards. It represents a bigger earnings multiple than BAA went for after a midnight auction between Goldman's and Macquarie and it is on a par with the price that P&O fetched after it was fought over by two strategic, state-owned buyers, for whom money was a secondary consideration.

The prospect of ABP going for an even higher price shows that there is even more value to be extracted from utility-style companies such as port operators than hitherto thought. The disappearance of ABP into the arms of one private equity consortium or the other will spell the demise of a quoted UK ports sector. It only leaves Forth Ports and how long before that is snapped up as a consolation prize by the losing bidder?

Nice to report, however, that for once a couple of UK institutions are in on the action rather than selling out to the foreigners altogether (Prudential has a 10 per cent slice of the Goldman's consortium).

Ah yes, poor old Goldman Sachs. After being outmanoeuvred by Citigroup in the scrap for BAA, are they regretting once again not launching a market raid of their own? Watch this space. Goldman's surely can't afford to lose yet another contest.

High-stakes dogfight over Airbus

Boeing has always believed the Airbus A380 superjumbo to be a white elephant. Customers for the 555-seater aircraft must be starting to wonder whether they have ordered a lame duck. The entry into service of the plane has already been delayed twice and now comes the shocking admission that when it does finally lumber into action at the end of this year, the launch airlines will have to wait another 12 months for deliveries to arrive. Unsurprisingly, some are already threatening to reach for their lawyers.

The delivery delays, blamed on "bottlenecks" in production, are going to cost Airbus and its majority shareholder EADS dear. EADS watched its share price crash and burn yesterday after it admitted that the fiasco could slice as much as €500m from its profits for each of the next four years.

BAE Systems, which just happens to be in the middle of negotiations to sell its 20 per cent stake in Airbus to EADS, smells a rat. The market capitalisation of EADS is one of the main yardsticks by which to value Airbus, and BAE suspects this has been deliberately massaged down so that the minority shareholding can be bought back on the cheap. If so, then orchestrating a 25 per cent drop in your share price and wiping €5bn from the value of the company, is a high-risk strategy to adopt.

Whether or not EADS is engaged in a tactical ploy, the fact remains that the A380 programme looks to be in trouble. If the delivery wait were a result of Airbus being a victim of its own success, this perhaps would not matter quite so much. But the A380 scarcely fits into that category. It has cost $12bn to develop and consumed $4bn of taxpayers cash but Airbus has hardly been knocked over by the rush of airlines wanting to buy the plane. So far 16 customers have placed orders for a total of just 159 planes. Airbus needs twice that number of sales just to break even on the programme.

EADS now says that some customers may choose to cancel their orders altogether while John Leahy, Airbus's chief commercial officer, made the following unnerving comment: "No one has discussed cancellation of the programme. It does not mean it will not happen in the future but right now everyone is sticking solidly with the programme." Hardly a ringing endorsement for the most important plane in the history of Airbus.

Boeing has long argued that the A380 is too big to appeal to more than a select band of long-haul carriers. It argues that what passengers - and therefore airlines - really want are planes which can fly fewer people longer distances on less dense routes, rather than gigantic airborne gin palaces which fly hub-to-hub packed with as many as 800 passengers, which is how some Far Eastern carriers would adapt the A380. Airbus puts the market for the A380 at 1,500 aircraft. Boeing reckons it is 500 at best. At the moment, it is not hard to see whose judgement looks more realistic.

But the A380 is not the only problem child for Airbus. It is also faced with the prospect of having to completely redesign its new mid-range 250-seater jet, the A350, after encountering a strong headwind of customer resistance. The revamped aircraft will have to be bigger, heavier and more powerful than the one on the drawing board at the moment and is likely to be twice as expensive to develop at about $8bn.

How BAE must be wishing it had taken up the open invitation to sell to EADS a year ago. BAE gamely continues to argue that nothing has happened to change the long-term value of its Airbus stake, which it put at £4.5bn when the negotiations with EADS began. That now looks like pie in the sky.

m.harrison@independent.co.uk

Comments